Consideration for Formation of Multiple Member Limited Liability Companies (“MMLLCs”) and Family Limited Partnerships (“FLPs”) (Part 2)

Special Allocations

One of the principal advantages of the partnership is the ability to make non-pro rata allocations of income, credits, losses and deductions to partners

A non-pro rata allocation of income, losses, credits and deductions to partners is respected by the IRS if the allocation has substantial economic effect. Whether an allocation has substantial economic effect involves a two-part analysis that is made as of the end of the partnership year to which the allocation relates. First, the allocation must have economic effect. Second, the economic effect of the allocation must be substantial.

In order for an allocation to have economic effect, the partnership agreement must provide for the following:

1. The capital accounts of the partners are maintained according with detailed rules in the regulations;
2. Liquidating distributions are made according with the positive capital account balances of the partners;
3. Any partner with a deficit balance in his or her capital account following the liquidation of his or her interest must restore that deficit to the partnership by the end of the taxable year in which the liquidation takes place if later, within ninety (90) days after the date of liquidation.

Instead of a deficit restoration provision, a partnership agreement may contain a qualified income offset, which operates to restore to at least S0.00 any unexpected reduction in a partner’s capital account that resulted in a negative capital account.

And thc economic effect of an allocation is not substantial if it merely shifts tax conscquences and changes recorded in the partners’ capital accounts do not differ substantially from the change that would have been recorded in their capital accounts without the allocation.

Did you know…

…since 2009, the Attorneys and Staff of Leventry, Haschak & Rodkey, LLC have substituted an interoffice Christmas gift exchange to bring a little more joy to families during the Christmas season?

Every year LHR’s Caring and Sharing Committee reaches out to local school districts: Ferndale, Richland, Westmont and Windber, and asks each school to provide us with contact information for one family who has shown a need throughout the school year. This year we have “adopted” five (5) families with a total of 27 people (10 adults and 17 children, two (2) of whom have special needs).

To ensure each person is getting something they really want or need for Christmas, we ask for every family member in all of our families to create a “wish list.’ Through the generosity of donations from the Attorneys and Staff of LHR, we purchase gifts, wrap every present and hand deliver the gifts, with the help of Santa Claus, to each of our families. We also prepare large food baskets that we fill with non-perishable and perishable food items for a holiday feast for each family.

Offering a helping hand is important to the Attorneys and Staff of LHR, and is a tradition that will continue within our of fice for many holidays to come.